Can Intentionally Filing an Improper Information Return Justify a Claim for Damages Under Section 7434?…Part I

As Les blogged last week, he moderated a panel on Friday dealing with Section 7434 private causes of action for the issuance of fraudulent information returns. Les was good enough to invite me to participate and bring down the esteem of the panel which otherwise consisted of him and the wonderful Mandi Matlock. Mandi, by the way, was a presenter extraordinaire, participating in three presentations at the ABA Joint Meeting in Austin. I don’t know how she did it, as I could barely do one coherently. The materials from the conference and the audio of the panel can be found here. Professor Bryan Camp was in attendance, and had kind words to say about the presentation in a brief post he did earlier this week on TaxProfBlog.

During the panel, Les outlined the general requirements for claims under Section 7434, and then presented various interesting questions regarding the interpretation and use of the statute to me and Mandi. All of the questions were interesting, but I purloined the most interesting question, which was if a fraudulently filed incorrect information return, which states the correct payment amount, is sufficient for a claim under Section 7434.

This post will focus on that question, and try to flesh out my somewhat off-the-cuff arguments in the presentation on why a fraudulent incorrect information return with the correct payment amount could allow for a valid claim under Section 7434. This area is evolving, so I would love for our readers to comment on this post and indicate why I am completely incorrect, or add additional points or arguments in favor of my position.

I previously framed this issue in the prior post aptly titled “Intentionally Wrong Form Not Fraudulent Filing of Information Return?” Although the title was not riveting, I think this is a really interesting issue, and I think all tax lawyers (business lawyers), and tax preparers should know about the Section.

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To get into this, let’s start with the statutory language in question:

In general. If any person willfully files a fraudulent information return with respect to payments purported to be made to any other person, such other person may bring a civil action for damages against the person so filing such return.

The question revolves around what must be “fraudulent” under the statute. Is it sufficient that the information on the return is correct, but the filer fraudulently selected the wrong information return, or does the filer need to have fraudulently included an incorrect amount on the form? And, perhaps another wrinkle, does the fraud have to be pertaining to the payment or specifically to the amount of the payment.

The most, by far, frequently seen area where this comes up is in the worker classification arena. In these situations, a worker believes she is an employee but the employer issues a Form 1099-Misc. That form states the correct amount of the payment, but misclassifies the compensation as “non-employment” compensation (or possibly “other income”).

The initial cases that looked at this (largely from the Southern District of Florida) determined that an incorrect form was sufficient to make a claim under Section 7434, but did not provide much in terms of analysis. For instance, in Seijo v. Casa Salsa, 2013 WL 6184969 (SD Fla. 2013), a dance instructor challenged her classification as an independent contractor and the court stated the dance instructor “produced evidence from which a reasonable factfinder could conclude that Casa Salsa violated [Section 7434] by filing Form 1099-Misc’s for the payments it made to her” because the instructor was not an independent contractor. This was followed by two other cases from the Southern District, including Leon v. Taps & Tintos, Inc., 51 F.Supp.3d 1290 (SD Fla. 2014), which involved a similar issue with bar tenders/waiters, where the court again stated, “Plaintiff has sufficiently alleged that Defendant issued Form 1099-MISC…and that the issued form violated Section 7434 where Plaintiff could properly be classified as an employee rather than an independent contractor.” Very clear statements that the incorrect form was sufficient to make a Section 7434 claim. Links to these cases can be found in my prior post, which is linked above.

More recently, Riordan v. ASAP Expert from the District of Kansas in May of 2017 entered a default judgement under Section 7434 for a plaintiff on this same W-2/1099-Misc issue. In Riordan, however, the defendants did not defend the case, which likely makes it not very influential.

Before getting into the other newer holdings on this matter, I think it is important to note that Riordan highlights an issue in these cases, which is that these cases are between two private parties that are taking these as one-off cases. There is no litigation strategy overall, and no common positions being taken. This means the varied arguments contribute to the courts taking a less coherent approach than many tax cases involving IRS as a party, and that it may be incumbent on the defendants to raise the issue discussed herein. Although this leads to uncertainty, it also is an opportunity for plaintiffs, as the responding lawyer may know nothing about this area of tax law.

Starting in 2016, courts began looking more closely at claims under Section 7434 with regard to this incorrect form issue. Liverett v. Torres Adv. Ent. Sols., LLC, 192 F.Supp.3d 648 (ED Va. 2016), is turning into the seminal district court holding on this matter. Liverett has been followed by Derolf v. Risinger Bros, which I wrote about before, and Tran v. Tran, 239 F.Supp.3d 1296 (MD Fla. 2017). And, the Southern District of Florida has changed its tune, and stated that it did not adequately consider this matter in the past cases and will now be following Liverett. See Vera v. Challenger Air Corp, 2017 WL 2591946 (SD Fla. 2017) (seriously, if you are an aerospace company in Florida, is Challenger the best name-I’m still scarred from watching the ’86 incident).

So, is this issue done? I don’t think so. Most people making these claims will be making other claims about the incorrect forms, so it will be easy enough to tack on a Section 7434 cause of action, and I think the Liverett court’s rationale is not air tight. Part 2 of this post next week will talk about Liverett and why I think there is some opportunity for a different conclusion than that court reached.

Comments

What happened to the Clean Hands Doctrine? Are the courts saying that an employee who accepts checks for the full amount earned, with no taxes withheld, should be excused for not knowing that a W-2 (“Wage and Tax Statement”) is issued to show tax withholding? If the employee just fell off the turnip truck, IRS has a form for that — Form 8919.

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Leslie Book

Keith Fogg

T. Keith Fogg is a Clinical Professor of Law at Harvard Law School where he started a tax clinic in 2015. Prior to joining the faculty at Harvard, he began his academic career at Villanova Law School in 2007 after working for over 30 years with the Office of Chief Counsel, IRS. Read More…

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